“Fixing” the Housing Market

Sometime early next year, the Obama administration will propose how to revamp the US mortgage market. Next Tuesday, the White House will hold a “summit” on the issue.

It’s safe to guess that none of the invitees will suggest the government should simply get the heck out of the mortgage market…so this morning, we’re left to speculate which options are more likely to be tried, and to tease out the resulting investment implications.

First, some relevant data: 325,229 US properties got a notice of default, auction, or repossession last month – down 10% from the previous year, but up 4% from the previous month.

92,858 properties were repossessed – up both month-to-month and year-to-year, indeed setting the second-highest total since RealtyTrac started keeping numbers in early 2005. So banks are working through their foreclosure backlog before sending out a truckload of new notices.

The numbers will “get a lot worse unless we see some job creation,” says RealtyTrac’s Rick Sharga, pointing out the obvious. Whoops, no luck on that score…

Another unfortunate number: First-time jobless claims “unexpectedly” grew last week to a five-month high, the Labor Department reports this morning.

And yet another: Home sellers are cutting their asking prices at an accelerating pace. 25% of the listings on the market as of August 1 have had at least one price reduction, according to Trulia.com. This is the fourth straight month in which price cuts have grown. As in so many other things housing these days, Vegas leads the way…

“If buyers are unqualified to buy, it doesn’t matter how low interest rates are or how discounted a home is,” says Trulia’s CEO, also pointing out the obvious. Thus…

Mortgage applications (both purchase and refinance) rose a meager 1% last week, despite rates on a 30-year fixed falling to 4.57% – a record low in 20 years of record keeping by the Mortgage Bankers Association.

“The homebuyer tax credit pulled forward future demand into late 2009/early 2010,” our stock market vigilante Dan Amoss explained last Friday. “Now that the tax credit has elapsed, demand is snapping right back to a very depressed level.” Record-low rates aren’t enough to get people in the tent. Nor will still lower rates that might result from the Fed’s plan to roll over its maturing mortgage securities into Treasuries.

Just yesterday, we saw a handful of initiatives that offer a hint of the direction things are going.

  • The White House plans to spend another $2 billion in unspent TARP money to help homeowners in 17 states with the highest unemployment
  • HUD will launch a $1 billion program offering unemployed homeowners a zero-interest loan of up to $50,000 for up to two years.

Wrapped in the language of “helping the unemployed,” the real aim of these programs is to prolong the extend-and-pretend games that keep the mortgage market from looking even more sickly than it is.

And they probably won’t even accomplish that, judging by the latest developments with the White House’s signature Home Affordable Modification Program. HAMP aims to help 4 million homeowners, but only 1.3 million have qualified for trial modifications…and a mere 390,000 have been granted permanent modifications.

It gets worse: Treasury reported last month that 8% of permanent modifications from Q3 2009 were 60 days delinquent, and 2% were 90 days delinquent. Then Treasury fessed up last week that Fannie Mae used “flawed methodology.” The actual figures are that 20% of the permanent mods are 60 days delinquent, and 15% are 90 days in arrears.

So the new initiatives, basically, amount to Band-Aids.

No matter what the White House decides to do, it doesn’t add up to a recovering housing market. Again, it’s all about jobs…and every jobs indicator we have is going in the wrong direction, even after fudging by the Bureau of Labor Statistics.

You want to position yourself for continued housing weakness. “We’re pursuing this theme in 2010,” says Dan Amoss, “because we’re trying to stay one step ahead of the market in anticipating the consequences of ‘extend and pretend’ in the banking system.”

Events are starting to move quickly.

By Dave Gonigam

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